2017 Cotton Economic Outlook
2016: Year in Review
While cotton and soybean prices trended upward, grain prices declined in 2016. Oil prices increased from the lows observed in 2015. World cotton production increased by 9.3% while the latest USDA estimate shows a 1% increase in consumption. However, ending stocks were reduced for the second year in a row due to increased Chinese reserve sales.
U.S. Balance Sheet
According to the latest USDA estimate, U.S. producers planted 10.1 million acres of cotton in 2016, an increase of over 17% from the previous spring. Increases were observed in all regions except the Southeast. The increased acres were primarily the result of higher cotton prices relative to grains and oilseeds, more favorable planting conditions in the Southwest, and increased water availability in the West.
The USDA estimate for U.S. mill use in 2016 is 3.3 million bales, down 150 thousand bales from 2015. The current estimate is in line with recent monthly consumption numbers.
NCC is projecting exports of 12.8 million bales due to current YTD sales. U.S. exports are estimated to be 39.3% higher in 2016. If the current pace of sales and shipments is maintained, the strong demand for high quality cotton could push the U.S. export number even higher than 12.8 million bales. The current U.S. export estimate breaks down into 12.2 million bales of upland cotton and 600 thousand bales of ELS cotton. The U.S. will remain the largest exporter of cotton with a market share of 35.8% as compared to 26.0% in 2015.
NCC Acreage Survey
Surveys were distributed on December 15 and responses were collected through mid-January. Respondents are asked to give their plantings of cotton, corn, soybeans, wheat, and other crops for 2016 and intended acreage for 2017.
Pre-Planting Market Signals
It is important to call attention to the ratios because past experience has shown that these ratios are reliable indicators of changes in cotton acreage. Historical data over the past 10 years shows a clear relationship between the price ratios and changes in cotton acreage. A review of the Council’s survey will begin with a look at the Southeast.
2017 Southeast Acreage
In Alabama, the survey responses indicate 14.2% more cotton acreage and less corn and wheat area. In Florida, respondents indicated more cotton and less soybeans.
In Georgia, cotton acreage is expected to decline by 3.1% with ‘Other Crops’, likely peanuts, pulling acres from cotton, corn and wheat. In South Carolina, acreage is expected to decline by 0.4% as cotton acres shift to soybeans and ‘Other Crops’.
In North Carolina, a 4.8% decline is expected as cotton acreage shifts to soybeans and ‘Other Crops’. Cotton acreage is expected to decline by 1.0% in Virginia as acreage shifts to corn and ‘Other Crops’.
Overall, across the Southeast, the states that had more issues with harvest in the past 2 years, including yield and quality losses, along with increased financial pressures, are showing the greatest reduction in cotton acres for 2017.
2017 Mid-South Acreage
Across the region, all states are expected to increase cotton acreage, while decreasing corn and ‘Other Crops’. The largest increase was reported in Mississippi with 26.8% more cotton acreage in 2017. Mississippi respondents expect to lower acreage of all other crops as more cotton acreage is planted.
In Tennessee, cotton acreage is expected to increase by 16.6% as land shifts away from corn. In all states except Mississippi, soybean acreage is expected to increase. In Arkansas and Missouri, corn, wheat, and ‘Other Crops’ are expected to decline. In Louisiana, respondents indicated more cotton, soybeans, and wheat and less corn and ‘Other Crops’.
2017 Southwest Acreage
Overall, Texas acreage is expected to increase by 9.5%. In south Texas, respondents indicate an 11.4% increase in cotton acreage as land shifts away from corn and wheat. Respondents in South Texas also indicated an increase in ‘Other Crops’.
Respondents from the Blacklands indicate a slight decrease in cotton and corn acreage and an increase in wheat and ‘Other Crops’. In west Texas, respondents indicated a 9.6% increase in cotton acreage and a decline in corn, wheat, and ‘Other Crops’.
2017 West Acreage
2017 ELS Acreage
U.S. Cotton Production
Summing together the upland and ELS cotton intentions shows U.S. all-cotton plantings in 2017 of 11 million acres, 9.4% higher than in 2016.
Once again, it is important to remember that the survey is a snapshot in time based on grower intentions. Changes in markets and weather will cause actual plantings to differ from early-season intentions.
Planted acreage is just one of the factors that will determine supplies of cotton and cottonseed. Ultimately, weather, insect pressures, and agronomic conditions play a significant role in determining crop size.
Since the NCC economic outlook does not attempt to forecast weather patterns, the standard convention is to assume yields in line with recent trends and abandonment consistent with historical averages. However, it is important to remember the volatility around estimated production given the uncertainty of weather patterns.
With abandonment assumed at 12% for the U.S., Cotton Belt harvested area totals 9.7 million acres. Using an average 2017 U.S. yield of 830 pounds generates a cotton crop of 16.8 million bales, with 16 million bales of upland and 760 thousand bales of ELS. The projected crop represents a 195 thousand bale decrease from the latest 2016 estimate.
U.S. Balance Sheet
As compared to this same time in the last marketing year, exports to all countries have increased, with the exception of Turkey. In most of the countries listed here, 2016 YTD exports are already higher than total 2015 exports. Large increases occurred in Pakistan, China, Indonesia, and India. While world trade increased slightly in 2016, the gain in U.S. market share is largely attributed to supply issues in other major cotton exporting countries. Brazil is projected to have a 33% reduction in cotton exports in 2016, while India’s exports are projected to be 24% lower. In addition, exportable supplies are limited in Central Asia and West Africa for the current marketing year.
China’s Balance Sheet
Although world mill use showed only a slight increase in 2016, cotton mill use in China is again showing signs of growth, but competition from lower-priced man-made fiber remains a limiting factor for the growth of cotton fiber use. China is not expected to increases imports until the reserves are further reduced, which could be in 2018/19. China has been reducing acreage and production for the past five years and is not expected to return to previous production levels.
It is important to mention that while China has made some adjustments to cotton production and raw fiber imports, they still remain an important player in the world cotton industry.
China Yarn Imports
Ratio of China Yarn Imports to Mill Use
China Cotton Balance Sheet
World Balance Sheet
World cotton stocks decline by 7.7 million bales in the 2017 balance sheet. While projections of global consumption exceeding production would normally be supportive of prices, the implications for the coming year may not be as clear cut. The majority of the decline in global stocks is due to reduced inventories in China. Stocks outside of China – an important barometer of price conditions – are projected to increase by 3.0 million bales.
World Cotton Trade
For the past three years, U.S. cotton producers have struggled with low cotton prices and high production costs. While current futures markets have increased since last year, many producers will continue to face difficult economic conditions in 2017. Production costs remain high and the slightly higher price is still not enough to cover all production expenses for many producers.
The increased stocks outside of China may contribute to a more bearish tone. As with any projections, there are always uncertainties and assumptions that can dramatically change the balance sheet. China’s stocks and import policy, as well as India’s ability to reenter the export market, provide significant uncertainty for global markets. In addition, a struggling global economy and competition from man-made fibers underscore the challenging landscape facing cotton demand. 2017 is shaping up to be another challenging year for the U.S. cotton industry. Council economists hope this outlook can provide insights to help the industry address those challenges.
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